Pacific Air Lines Annual Report 1958

1958
Bert Allenberg*
John H. Connelly
William Goetz
Floyd Hendrickson
BOARD OF DIRECTORS
Leland Hayward, Chairman
Harry White
GENERAL OFFICES:
T. R. Mitchell
Daniel O'Shea
Walter Roche
William B. Smullin
San Francisco International Airport
San Francisco 28, California
OFFICERS:
John H. Connelly
T. R. Mitchell
C. A. Myhre
E. Roger Dahl
R. E. Costello
Max A. King
Walter Roche
Floyd Hendrickson
President and General Manager
Executive Vice President
. Vice President-Finance
. Treasurer
Vice President-Traffic
Vice President-Sales
. Secretary
Assistant Secretary
AUDITORS
PRICE WATERHOUSE & CO.
120 Montgomery Street, San Francisco, California
REGISTRAR
Bank of America
300 Montgomery Street
San Francisco
* Deceased
TRANSFER AGENT
Crocker-Anglo National Bank
1 Montgomery Street
San Francisco
Leland Hayward.
Chairman
John H. Connelly
President
C. A. Myhre
Vice President
R. E. Costello
Vice President
Walter Roche
Secretary
T. R. Mitchell
Vice President
E. Roger Dahl
Treasurer
Floyd Hendrickson
Asst. Secretary
Max A. King
Vice President
1958
1957
1956
1955
1949
TO STOCKHOLDERS, EMPLOYEES, AND PATRONS
PACIFIC AIR LINES, INC.
OPERATING RESULTS
During the year 1958 more than 351,000 passengers were carried almost 79
million passenger miles in scheduled service, which is a 10 per cent increase
in number of passengers carried and 12 per cent increase in passenger miles
over the previous year. This growth was achieved in spite of the general busi-
ness recession which was felt along the Pacific Coast during the first half of
the year.
During this period more than 26,000 passengers were carried between Burbank-
Las Vegas and San Francisco/Oakland-Las Vegas, over which routes service
was inaugurated in September, 1957. Further substantial growth in this new
market is anticipated for the coming year.
Shown below is a ten-year comparison which sets forth the gains your Com-
pany has made in market penetration and indicates the growing importance of
the Company's contribution to the economic growth and development of the
Pacific area.
Miles Passengers Available Passenger
Flown Carried Seat Miles Miles
5,384,049 351,982 147,312,486 78,331,650
4,551,716 319,276 124,398,543 69,999,789
4,048,797 259,522 107,084,154 55,917,208
3,316,457 236,083 79,005,186 47,131,928
2,419,695 114,573 50,399,055 20,947,484
Load
Factor
53.2%
56.3
52.2
59.7
41.6
REVENUE AND EXPENSE
Your Company's revenue, excluding mail pay (subsidy), increased 22 per cent
over the previous year to a record high of $5,143,950. This increase was due
primarily to the record number of passengers carried and an approximate 10
per cent increase in passenger fares.
As indicated in prior reports, Pacific Air Lines has been operating since Jan-
uary 9, 1956, under a temporary Mail Rate sufficient only to cover our op-
erating break-even need. During December 1958 negotiations were begun
with staff members of the Civil Aeronautics Board towards establishing a
permanent mail rate, calculated to cover the above-mentioned break-even need
recognized as necessary by the Civil Aeronautics Board and, also, a return after
taxes, based on your Company's investment. These negotiations were concluded
early in 1959 and, on May 19, 1959, the Board issued an order fixing a per-
manent rate for the period from Januay 9, 1956, through September 30, 1958.
This order also fixed a rate for the year beginning October 1, 1958. In accord-
ance with this order, cash funds totaling $869,419 were received on June 15,
1959. These funds substantially improve the working capital position of your
Company as reflected in the accompanying financial statements.
The summary of the operating results for each of the three years ending De-
cember 31, ( after adjustment for this revised rate) is presented below:
YEAR ENDING DECEMBER 31
Revenues: 1956 1957 1958
From transportation of passengers,
freight, mail, etc. ------------------------ $3,573,724 $4,216,726 $5,143,950
Federal subsidy ------------------------------ 1,795,805 2,056,930 2,357,763
$5,369,529 $6,273,656 $7,501,713
Operating expenses ---------------------------- 5,154,251 6,044,896 7,263,997
Operating income ------------------------------ $ 215,278 $ 228,760 $ 237,716
Other expense, Net, ------------------------ 48,230 122,961 81,550
$ 167,048 $ 105,799 $ 156,166
Estimated Federal rncome taxes ______ 93,017 64,743 93,000
Net earnings for year ----------------- $ 74,031 $ 41,056 $ 63,166
FLIGHT EQUIPMENT
As previously reported to you, Pacific placed an order with Fairchild Engine
& Airplane Company on February 15, 1957, for three F-27 jet powered 44~
passenger aircraft. This order was subsequently increased to 6 aircraft, spare
Rolls Royce engines, and other related spare equipment.
The first 3 F-27 airplanes were placed in revenue service on April 26, 1959,
and the last 3, which were delivered in June, 1959, were placed in service as
of July 1, 1959.
Financing for the above aircraft was arranged through the Bank of America
on November 21, 1958, in the amount of $5,631,000, and, in accordance with
Public Law No. 307, $4,631,000 of this loan is guaranteed by the United
States Government.
Principal payments will aggregate $663,000 per year through 1963 and
$463,000 per year for 1964 through 1968. It is anticipated that principal pay-
ments and a substantial portion of the interest payments will be provided by
depreciation on all the Company's aircraft and related equipment.
Your Company's aircraft fleet now consists of 6 F-27 44-passenger jet powered
aircraft; 7 Martin 44-passenger aircraft; 10 Douglas 28-passenger DC-3's;
1 Lockheed 6-place aircraft; and 1 PBY 28-place amphibian. The Lockheed is
used by Company executives, auditors, and personnel in inspections of your sta-
tions at 28 cities. The amphibian will be used in charter and Catalina Island
servICe.
ROUTE DEVELOPMENTS
In our continuing effort to strengthen, improve, and expand our system, the
Company was involved in three major route cases during the year:
The PACIFIC NORTHWEST case concerned the question of additional
local air service along the northern half of the Pacific Coast. On May 28,
1959, a Board order was issued whereby your Company's route was ex-
tended north to Portland and by the same order the route of West Coast
Airlines was extended south to San Francisco. It is anticipated that service
to Portland will be inaugurated ( with your Company's newly-acquired
jet powered Fairchild F-27 aircraft) during the summer of 1959.
In the PACIFIC SOUTHWEST case Civil Aeronautics Board certifica-
tion is sought to provide non-stop service between the following pairs of
cities: San Francisco-Los Angeles; San Francisco-Las Vegas; Burbank-Las
Vegas; Los Angeles-Las Vegas; and Sacramento-Reno. Your Company has
also applied to provide service to the San Joaquin Valley cities of Fresno,
Modesto, and Visalia, as well as authority to serve the cities of San Diego,
Palm Springs, and Long Beach. Formal hearings commenced in April,
1959, and it is expected that a final Board decision will be reached in
1960.
In the SERVICE TO SANTA CATALINA case, Docket No. 7149, the
Company requested authority to provide service to Santa Catalina from
Burbank, Los Angeles, Long Beach, and San Diego. This application was
rejected by an order of the Board issued in April, 1959. However, upon
petition for reconsideration, the Civil Aeronautics Board on June 4, 1959,
issued Exemption Order No. E-13981 authorizing inauguration of service
from Los Angeles, Burbank, and Long Beach to Catalina on a temporary
basis pending final decision on our petition for reconsideration.
PERSONNEL
The progress made by your Company during 1958 was due in a large measure
to the efforts of Pacific's skilled and loyal employees, all of whom are now cov-
ered by a Company pension plan. During this period Pacific reached amicable,
collective bargaining agreements with all segments of its work force without
loss of a single man-day due to labor disputes. These contracts provide rates
of pay, fringe benefits, and working conditions in line with other compara-
ble carriers. No labor problems are anticipated for the coming year.
IN MEMORIAM
The death of our beloved Director, Bertrum Allenberg, on November 27,
1958, terminated a long, fruitful, and happy association. His pleasant, warm
companionship and sage advice will be greatly missed. He not only created
a better section of the world in which he lived, but impelled by brotherly love
and generosity, earned the ever-lasting gratitude of those who benefit from
his association and memory.
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FUTURE
With your Company's extended routes over which our new equipment will
operate, combined with our strengthened financial position, we look forward
to 1959, based on results to date, as a good year for Pacific Air Lines. As the
rapid growth of this region continues, your Company, whose routes cover the
very heart of the Pacific area, may be expected to become an increasingly valued
property. Growth trend curves based on historical statistical data of only our
Martin equipment and recent F-27 passenger loads indicate possibilities of at-
taining average annual loads of approximately 33 passengers while, at the
same time, offering a frequency of service suitable to traffic needs, sound econ-
omy, and maintaining an conomically realistic competitive position in our major
markets. To meet these growth demands, additional modern equipment will be
required in order to provide the public with adequate service. Although your
management feels that a reasonably high frequency of flights should be offered
where warranted, a careful balance, however, must be maintained between
flight frequency, cost and traffic development. High frequency, brought about
as a result of small aircraft capacity, is economically undesirable. Therefore,
in order to avoid resorting to high flight frequencies, with the attendant in-
crease in operating costs, aircraft of approximately 55-passenger capacity, per-
mitting an operating load factor of 60 per cent, may be indicated in servicing
our most dense routes, which routes, of course, offer the maximum opportunity
for profit. The capital requirements to finance further equipment needs will
impose underwriting problems; however, improvements in net earnings should
also result.
The retirement of the DC-3's begins a new era in local air service as there is
now available ample, comparative statistical data indicating that the saleability
of DC-3 service is not conducive to traffic development. As the transition to
modern equipment takes place, passenger loads will increase through substan-
tial diversion of intercity traffic presently moving via automobiles, buses, and
trains, resulting in increased revenue and less subsidy. The traffic potential of
our densely populated area can not be developed fully without the most modern
equipment.
President
Operating revenues:
Passenger _______________________________ _
_______________________________________________ _
Mail ----------------------------------------------------------------------------------------
Charter and contract operations --------------------------------------------
Express, freight and excess baggage ------------------------------------
0th er _____________________________________________________________________________________ _
Federal subsidy ----------------------------------------------------------------------
Operating expenses:
Flying operations ------------------------------------------------------------------
Direct maintenance-flight equipment --------------------------------
D . . fl" h .
eprec1atton- 1g t eqmpment --------------------------------------------
Direct maintenance-ground equipment ------------------------------
Maintenance burden -------------------------------------------------------------
Passenger service --------------------------------------------------------------------
Aircraft servicing ------------------------------------------------------------------
Traffic servicing --------------------------------------------------------------------
Promotion and sales --------------------------------------------------------------
Advertising ----------------------------------------------------------------------------
General and administrative ----------------------------------------------------
Depreciation-ground equipment ----------------------------------------
Operating income
Other (income) and expenses:
Interest _
____________
___________________________________________ . __________________________ _
Extension and development --------------------------------------------------
Net loss on disposition of assets ------------------------------------------
Adjustment of spare parts inventory _____________________________________ _
Others, net ------------------------------------------------------------------------------
Estimated federal income taxes
Net earnings for year------------------------------------
Retroactive subsidy for 1956 less related federal income tax _____ _
Earnings retained for use in the business:
Balance, beginning of year ----------------------------------------------------
Balance, end of year --------------------------------------
Year ended December 31
1958 1957
(Note C)
$4,603,419 $3,791,591
122,400 116,605
289,475 199,257
113,321 91,684
15,335 17,589
5,143,950 4,216,726
2,357,763 2,056,930
7,501,713 6,273,656
2,372,282 1,906,179
1,201,281 1,014,200
358,157 350,955
3,931,720 3,271,334
117,336 82,204
44(011 351,828
287,117 231,340
481,018 379,739
1,063,402 870,970
168,822 122,900
243,739 218,956
429,872 424,850
99,960 90,775
3,332,277 2,773,562
7,263,997 6,044,896
237,716 228,760
61,798 62,757
14,377 10,172
10,129 6,741
43,417
(4,754) (126)
81,550 122,961
156,166 105,799
(93,000) (64,743)
63,166 41,056
69,021
1,134,353 1,024,276
$1,197,519 $1,134,353
ASSETS
Current Assets:
Cash
Accounts receivable:
United States Government- mail, pas-
sengers and other --------------------------------
Traffic and agents ------------------------------------
Miscellaneous, less allowance for pos-
sible losses (1958-$8,306; 1957-
$13,000) ----------------------------------------------
Employees -----------------------------------------------
Inventories of materials and supplies, at
approximate cost, not in excess of mar-
ket ____
_____
_
_
_
____
_
___
_
_
___
___________
______
____________
_
_
_
__ _
Prepaid expenses ------------------------------------------
Property and Equipment, at cost:
Flight equipment - pledged under notes
payable ----------------------------------------------------
Ground and other equipment _
______
________
_
_
_
___
_
Less-Accumulated depreciation ______
_____
_
_
_
Construction in progress ------------------------------
Deposits on purchase of flight equipment
(Note B) -----------------------------------------------
Investments in Service Organizations,
at cost
Deferred Charges:
Extension and development expense _________ _
Other ------------------------------------------------------
December 31
1958
$ 61,930 $
1,672,273
211,461
74,806
7,672
248,315
41,064
2,317,521
4,215,728
725,778
4,941,506
2,750,206
2,191,300
156,296
385,786
2,733,382
4,321
32,802
32,802
1957
12,120
989,727
160,038
26,192
3,834
233,379
3'6;059
1,461,349
3,832,399
678,956
4,511,355
2,123,072
2,388,283
92,695
145,786
2,626,764
4,321
37,521
64,681
102,202
$5,088,026 $4,194,636
LIABILITIES
Current Liabilities:
Notes payable - current instalments on
long-term debt ----
0 ---- --- ---- --- - ----- - -------- - ----- -
Accounts payable ----------------------------------------
Taxes collected or withheld from others ___ _
Accrued expenses ----------------------------------------
Transportation sold, not yet used or re-
funded ---------------------------------------------------
Estimated federal income taxes ____
_____________ _
Long-Term Debt:
5o/o notes payable to bank-secured by
chattel mortgage on flight equipment-
maturing in monthly instalments to De-
cember 15, 1963. (Note A)-------------------
Conditional sales contract ----------------------------
Provision For Federal Income Taxes of Future
Years
Capital Stock and Surplus:
Common stock:
Authorized, 40_
,000,000 shares of 50c
par value per share
Issued, 671,410 shares ---------------------------
Paid-in surplus --------------------------------------------
Earnings retained for use in the business,
per accompanying statement (Notes A
and C) ---------------------------------------------------
$
December 31
1958 1957
349,415
1,439,901
131,182
193,334
30,390
349,820
2,494,042
735,387
6,274
741,661
72,775
335,705
246,324
1,197,519
1,779,548
$ 490,187
917,697
92,108
155,960
29,997
172,742
1,858,691
515,787
515,787
103,776
335,705
246,324
1,134,353
1,716,382
$5,088,026 $4,194,636
NOTES TO FINANCIAL STATEMENTS
NOTE A:
December 31, 1958
NOTE B:
Notes payable at December 31, 1958 comprised
the following:
5 % secured bank loan, under agree-
ment dated May 1, 1957, due June
15, 1958. Repayment extensions
were obtained and the indebted-
ness was liquidated on June 17,
1959 ------------------------------------------------$ 142,000
5 % secured bank loan, under agree-
ment dated November 21, 1958,
payable in monthly instalments of
$16,700 commencing January 15,
1959-secured by the Company's
present flight equipment _
_________
_____
_
Conditional sales contracts ______________
_
_
935,787
13,289
$1,091,076
In addition to the foregoing, the Company entered
into two new bank loan agreements dated Novem-
ber 21, 1958 to finance the purchase of new flight
equipment ( see Note B); the particulars of the loan
agreements are as follows:
5 % loan, payable in monthly in-
stalments of $5,500 for each new
Fairchild aircraft acquired, to Jan-
uary 15, 1960, and $33,000 month-
ly thereafter-to be secured by
new Fairchild aircraft and equip-
ment ------------------------------------------------$3,964,500
5 % loan, payable in monthly in-
stalments of $5,550, commencing
July 15, 1959-to be secured by
new Fairchild aircraft and equip-
ment. ---------------------------------------------- 666,500
On November 17, 1958, the Civil Aeronautics
Board undertook to guarantee 90% of the principal
amount and 100 % of the interest on the two 5 %
loans aggregating $4,631,000.
Under the terms of the November 21, 1958 loan
agreements, the Company has agreed that ( 1) it will
not, without the prior written consent of the bank,
pay any dividencfs ( except in stock) or purchase,
redeem or otherwise acquire for value any of its out-
standing shares, and ( 2) commencing January 1,
1959 will maintain current assets at least equal to
current liabilities; for the purpose of this computa-
tion, current instalments under the November 21,
1958 loan agreements may be excluded from current
liabilities and 60-75 % of any claims for retroactive
subsidy pending before the Civil Aeronautics Board,
less provision for taxes, may be included in current
assets.
The Company has agreed to purchase six new Fair-
child F-27 turbo-prop aircraft and related spare en-
gines, equipment and parts for a total cost of approxi-
mately $5,340,000, against which advance payments
of $385,786 had been made as of December 31,
1958. All aircraft and a substantial portion of the
equipment was received during the first half of 1959.
Payment therefor has been made principally from
the proceeds of the bank loans as mentioned in
Note A.
NOTE C:
On June 9, 1959 the Civil Aeronautics Board fixed
the rates of compensation which the Company is to
receive for the transportation of mail by aircraft after
January 9, 1956. As a result of this settlement, which
was recorded in the accounts as of December 31,
1958 the statement of earnings for 1957 has been
restated as follows:
Previously As
reported restated
1957 earnings ____________
$ 103,139 $ 41,056
Adjustment applicable
to 1956 ________
__________ 125,645 69,021
Earnings retained for
use in the business,
December 31, 1957, 1,253,060 1,134,353
NOTE D:
On September 8, 1958, the Board of Directors ap-
proved a participating retirement plan for all employ-
ees of the Company, other than those who participate
in the retirement plan for pilots. The plan is insured
and is effective July 1, 1958. To become eligible to
participate in this plan an employee must have had
five years service with the Company and have attained
the age of 25; no credits accrue to employees for serv-
ices prior to July 1, 1958. The estimated cost to the
Company of such plan for the first policy year is
$25,000.
As at December 31, 1958, the estimated unfunded
portion of past service costs, payable over the next
eight years, under the retirement plan for pilots,
amounted to approximately $153,000.
NOTE E:
In accordance with the request of the Civil Aero-
nautics Board the Company has in 1958 transferred
def erred overhaul costs from def erred charges to
flight equipment and the 1957 figures have been re-
stated in order to be comparable. The Company also
in 1958 changed its method of providing for the
cost of overhaul of aircraft. The result of such change
was to increase the charge to direct maintenance by
approximately $40,000.
PRICE WATERHOUSE & Co.
To the Board of Directors of
Pacific Air Lines, Inco
120 MONTGOMERY STREET
SAN FRANCISCO 4
June 29 1959
In our opinion, the accompanying statements present fairly
the financial position of Pacific Air Lines, Inc o at December 31 1958
and the results of its operations for the year, in conformity with
generally accepted accounting principles o These principles have been
applied on a basis consistent wi~h that of the preceding year, except
for the change which we approve, in the basis of providing for the
cost of overhaul of aircraft as described in Note E to the financial
statementso Our examination of these statements was made in accord-
ance with generally accepted auditing standards, and accordingly
included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstanceso Certain
receivables from the United States Government selected for tests were
not confirmed by direct correspondence, but we satisfied ourselves as
to these amounts by means of other auditing procedures.
Pacific Air Lines provides fast, comfortable, economical flights
to major vacation areas of the Pacific Southwest.
Portland and Catalina are now easily accessible with
Pacific's new swift service.
For a more enjoyable vacation, arrive refreshed and
relaxed-Above All Fly Pacific Air Lines!
Las Vegas offers the vacationer the quietness and stillness of a desert
night as well as excitement of the bright lights and the spinning wheel.
The relaxing atmosphere of Avalon has
made Catalina Island a favorite of millions.
DING
BLUFF
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LEGEND
- = Routes
Non stop
Service
New Routes
-Pending
CAB Action
Francisco-Oak
ctions of this b
The charm and serenity of Santa Barbara remain unchanged
since the days of the Padres and the Conquistadores.
PACIFIC
AIR LINES
JETHAWK